International Series

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Unit 23 — Productivity

Purpose:

To explain the factors that affect productivity growth and the various ways in which the government has helped or hindered the growth in productivity.

Objectives:

Labor productivity is defined as output per man-hour of employed labor. Factors that are important in determining productivity include education, training, the amount of capital (machinery, factories, etc.) per worker and technological innovation.

During the 1970s productivity growth in the U.S. slowed. A variety of explanations has been offered for this. They include: a decline in R&D; a decline in investment relative to GNP; the relative inexperience of the baby-boom generation; the oil shocks; increased government regulation; and uncertainty due to inflation and the changeability of economic policy. In the 1990s and the 2000s, productivity growth accelerated. Debates about the causes of this acceleration have been heated.

Technological innovation has been a major factor in the growth in productivity in the U.S. The benefits of innovation accrue not only to the person or firm that financed the research, but also to society as a whole. Therefore, there is a justification for some government support of research and innovation.

The government may have retarded productivity growth because of tax and regulatory policies. Taxes can hurt productivity growth by distorting economic decisions and by encouraging people to invest their time and money in ways that reduce their taxes rather than in ways that are good for economic growth.

Audio and Transcripts

Meet the Series Experts

Pioneer in the development of the U.S. National Income and Product Accounts, with an international reputation as the originator of “growth accounting,” the identification and quantification of the sources of growth in real national income/product.

Q. B. Jones is president of Medigadgets, Inc., a manufacturing firm specializing in equipment and supplies for the medical field. Jones works hard to attract investors for Medigadgets, and about 10% of the firm’s gross is reinvested. Jones’s rationale is that such investment is essential to high productivity. “Our people have the very latest equipment to work with,” says Jones. “We are light years ahead of our nearest competitors.” Jones’s perspective in this case is PROBABLY:

accurate, since capital formation through investment has been a major contributor to economic growth in the U.S.

questionable since research shows most investment goes to support R and D, not to create new capital.

justified only if the private investors are realizing a profit comparable to that of Medigadgets.

faulty since too much investment in capital invariably depletes resources that could be used in other ways.

accurate, since capital formation through investment has been a major contributor to economic growth in the U.S. One of the reasons for our continued economic growth has been a 10% investment of GNP/GDP in new plant and equipment. As a result, American workers have modern facilities and equipment to support their efforts, thus making them more productive.